Have a Business in France? Here’s How to Brace for a Tax Search

Tax searches are a powerful way for the French tax authorities to gather evidence, as they allow them to seize all documents on a company’s premises that may reveal tax fraud. The searches may affect all companies, whether small or multinational.

According to a public report released by the French Ministry of Finance, more than 160 tax searches on company premises were carried out in France in 2021. The amount of tax adjustments made by the authorities following these searches was more than 562 million euros ($609 million)—417 million euros in principal and 155 million euros in tax penalties.

Since taxpayers are not informed in advance of a tax search, several questions arise: Why do the tax authorities carry out a search? Who can be the subject of a search? What documents can be seized and how can they be used? What tax penalties are likely to be applied by the tax authorities?

Fighting Tax Evasion

A tax search is a intensive procedure requiring considerable resources, which is why the tax authorities do not conduct many of them—less than 200 searches a year, out of around 140,000 tax audits on companies.

However, unlike other tax audit procedures, a search allows the tax authorities to obtain information that is not available during an audit, such as emails and internal documents on the implementation of a tax scheme.

According to the tax authorities’ report for 2021, the categorization of searches is:

• Undeclared activity in France by a foreign company—79%;
• Abusive reduction of the tax basis—17%;
• Failure to file tax returns—2%;
• Value-added tax fraud—2%.

This breakdown, which is similar to those in previous years, shows that searches are mainly used by the tax authorities to look for undeclared activities in France by foreign companies. For example, the authorities may wish to use information obtained in a search to try to demonstrate that one or more subsidiaries of a multinational group are either run from France, and therefore have their effective place of management there, or have an undeclared permanent establishment.

Who May Be in Scope?

The tax search is related to the investigation of tax offenses in corporate income tax and VAT. Thus, the main cases in which a search is carried out involve:

• Undervaluation of taxable income;
• False invoices;
• Abusive location of profits abroad;
• Use of shell companies;
• Activities not declared in France.

How Is a Search Prepared by the Tax Authority?

There are four main steps before carrying out a search.

Step 1: Looking for Potential Tax Fraud

The tax authorities look for complex tax frauds that may involve taxpayers in France. The authorities have many sources of information, including:

• Whistleblowers who may be, for example, former employees of a company and who wish to give information to the tax authority;
• Internal inquiries in various sectors that may reveal undeclared business activities in France;
• Information received from the French unit fighting money laundering and financing of terrorism (TRACFIN).

The tax authorities then select targets for which a search will be the best way to find evidence of tax fraud.

Step 2: Launching Tax Inquiries to Collect Information

To gather evidence of fraud, the tax authorities carry out an inquiry on taxpayer under suspicion, by, for example:

• Collecting information from tax audits on other taxpayers who may have relationships with the suspected taxpayer;
• Requesting information from foreign tax authorities.

These investigations are carried out discreetly so that the taxpayer suspected of tax fraud will not be alerted to a potential search.

Step 3: Drafting a Report Containing Evidence of Tax Fraud

The tax authorities draw up an investigation report that will be used as the basis for a request sent to a judge to authorize the search. This report includes all the authorities’ investigations and the conclusions drawn from them. It must contain sufficient evidence to establish a presumption of tax fraud.

For example, the report may indicate that, according to information collected from the inquiries:

• A foreign company carries out business activities in France without filing a tax return;
• The foreign subsidiary of a French company has no substance, and all the activity most likely is carried out from France.

Step 4: Authorization by Judge to Conduct the Search

The search must be authorized by a judge, who makes their decision on the basis of the authority’s report. The taxpayer is informed of the judge’s authorization by the tax authority officers only at the start of the search.

How Does a Tax Search Work?

People Who Carry Out the Search

The search will be carried out by tax authority officers and judicial police officers. The officers belong to a unit dedicated to tax inquiries (Direction Nationale des Enquêtes Fiscales, or DNEF). The search may not start on the company premises before 6 a.m. or after 9 p.m.

Seizure Operations

During the search, the authorities seize written documents, computer files, mailboxes, etc. In principle, the only documents that can be seized are those that are likely to provide evidence of the offense and whose search has been authorized by the judge. Documents that are covered by legal privilege cannot be seized unless they have been used for the purpose of committing, or facilitating the commission of, a tax offense.

When information is stored in computers, the tax authorities manage the data and seize only the information that is likely to be related to the offense. However, if it is too difficult to sort out the relevant information, the authorities may make a complete copy of the information contained in files and mailboxes, and will need to set apart irrelevant documents after the search.

It is highly recommended that taxpayers ask their lawyers to come immediately at the start of a search to monitor the seizure operations.

Drawing Up a Seizure Report

An official document is drawn up at the end of the seizure operations. This document is very important as it includes the identity of those who carried out the search, the chronology of the operations, and an inventory of the documents seized.

No Tax Questioning

Questioning is not allowed in the context of a search. However, taxpayers are allowed to make a spontaneous statement, for example, on how they carry out their activities.

Return of Seized Documents

Seized documents must be returned by the tax authorities to the taxpayer within six months of the search.

What Are the Consequences of a Search?

Challenging the Search

A taxpayer may challenge the search before the Court of Appeal. For example, the taxpayer may contend that the indications of fraud mentioned in the judge’s authorization do not correspond to reality, or that the search operations were not carried out regularly.

In general, it is always advisable to check whether there are any means of challenging the tax search. If the Court of Appeal decides to cancel the search, the documents seized can no longer be used and, in practice, the risk of a tax audit falls considerably.

Use of the Seized Documents by the French Tax Authorities

It must be emphasized that a tax search is not a tax audit, but only a way for the authorities, subject to a judge’s authorization, to collect evidence of tax fraud. There is no legal link between a tax search and a tax adjustment, which must be done in the course of a tax audit procedure.

After the search operations, the tax authorities have to manage the information seized. In practice, the DNEF officers proceed to the reading of the documents and the search for a tax offense. The officers will try to use the information they have to bring proof of tax fraud.

An internal report is then drawn up. This report indicates whether a tax audit should be undertaken. This report is an internal tax authority document and is not transmitted to the taxpayer. Therefore, from the end of the tax search, the taxpayer has absolutely no information from the tax authorities until the potential start of a tax audit procedure. In a case where the authorities finally consider that there is no need for a tax audit—which should not happen in practice as they have gathered evidence of tax evasion before the search—the taxpayer is not informed.

It might be considered that there is a lack of information provided to the taxpayer, who has to wait for a formal notification from the tax authorities stating that a tax audit is about to begin.

Tax Audit Operations

When the DNEF officers have finished managing the seized information, their report is sent to a tax audit department to carry out an audit. In practice, the tax audit operations take place quickly after the search.

As part of the tax audit procedure, the tax authorities must inform the taxpayer of the information on which tax adjustments are founded, and send the documents used to the taxpayer if they ask for them.

In practice, the tax audit department relies on the work of the DNEF officers.

Since searches are carried out in cases where the tax authorities consider that there are indications of tax fraud, it is very common for the authorities to apply tax penalties.

Tax penalties may be 40% for bad faith, and 80% for fraudulent tax schemes or discovery of undeclared activity in France.

Is There Any Way to Regularize the Tax Situation?

French tax regularization mechanisms are not practicable. French tax law includes several mechanisms that allow taxpayers to amend their tax returns, even in the course of a tax audit, but only in cases where no tax penalties for bad faith have been applied. Therefore, insofar as in most cases following a tax search some tax penalties will be applied, taxpayers are out of the scope of this type of mechanism.

There is also a tax compliance unit that allows taxpayers to file amended tax returns, in particular in cases of undeclared permanent establishment of a foreign company in France, or tax schemes designed to evade taxation.

In such cases, where high penalties (40% or 80%) are normally applied by tax audit units, lower tax penalties are applied. However, the request by the taxpayer must be spontaneous and, in practice, requests made by taxpayers following a search are considered to be out of scope.

The Possibility of a Global Settlement

In the tax audit procedure framework, in some complex cases where there is no tax certainty it is always possible to ask the tax audit unit whether it would agree, as part of a global settlement, with the taxpayer filing amended tax returns. In return, the tax authorities would reduce the penalties applicable.

What Exchange of Information Is There With the Public Prosecutor?

At the tax search stage there is no exchange of information between the tax authorities and the public prosecutor.

However, in the course of the tax audit procedure which follows the tax search, information may be exchanged:

• Tax authority officers may freely exchange information with the prosecutor as the tax secrecy rule is waived;
• Depending on the level of penalties that will be applied and the amount of the tax adjustments at the end of the tax audit procedure, the case may have to be sent by the tax authorities to the public prosecutor.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Thierry Viu is Counsel at CMS France.

The author may be contacted at: thierry.viu@cms-fl.com

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